Measuring the Impact of Establishment Level Agglomeration on Productivity: Industrial specialization and urbanization effects

This paper investigates the effect of agglomeration on the productivity of manufacturing establishments using data from Japan’s Census of Manufactures. For this purpose, we propose a distance-based index defined for each establishment, rather than one based on data aggregated per administrative unit level, as a measurement of agglomeration. Our index is designed to reflect locational heterogeneity within a region as an administrative unit and avoids biases caused by spatial correlations and other problems associated with segmenting data based on administrative boundaries. In addition, we create two different indices to measure two different types of agglomeration—industrial specialization and urbanization—based on data at the four levels of the Japan Standard Industrial Classification (JSIC). Using these indices, we measure the impact these two phenomena have on labor productivity and total factor productivity (TFP) for various industries categorized as growing, declining, labor intensive, and asset intensive. Our analysis finds a positive correlation between the two agglomeration indices as well as labor productivities and both of the indices. Meanwhile, it shows that TFP values, calculated for establishments with 30 employees or more, are positively correlated with the urbanization index, whereas TFP and the industrial specialization index are uncorrelated in most industries and negatively correlated in some. As an exception, we find some industries for which both the industrial and urbanization indices are positively correlated with TFP, all of them categorized as declining. In some of the industries categorized as growing, no correlation is observed between TFP and agglomeration, whether urbanization or industrial specialization. These findings imply that certain attributions—establishment size, industry type, etc.—can serve as a guide for the government in identifying the effective target of cluster promotion policy.